Corruption is one of the most pressing challenges for Nepal, with profound implications for the nation’s economic growth and international standing. Over the years, systemic corruption has seeped into all facets of the government branches, creating barriers to Foreign Direct Investment (FDI) and slowing down progress in key sectors like agriculture, tourism and energy.

According to the 2024 Investment Climate Summit Report of the US government, corruption remains the number one barrier to FDI in Nepal. As the global economy becomes more interconnected, the ability to attract foreign capital is crucial for Nepal to build infrastructure, create jobs and have a direct impact on the quality of life for its citizens. However, corruption has made the investment landscape highly unpredictable, thereby discouraging international investors.

Recent discussions about amending Nepal’s anti-corruption laws have raised concerns over the country’s future. A proposed bill that would introduce a five-year limit on investigating corruption cases was seen as a dangerous step that could undermine progress in combating corruption. Although the amendment has not yet passed, the message it sends to the international community is one that signals caution for investors. Many are already questioning whether Nepal is fully committed to creating a transparent and accountable system. The fate of this legislation will have a profound impact on Nepal’s reputation in the global market and its ability to attract foreign investment.

Corruption as a Barrier to Economic Growth

Nepal’s economic potential remains largely untapped due to systemic corruption creating an uncertain and unappealing investment environment. The US report highlights how investor confidence - both internal and external - is undermined by the “endemic, institutionalised and driven from the top” corruption deep-rooted in all sectors of Nepal. Moreover, without the inflow of capital investment, Nepal faces a growing financial gap, hindering infrastructure and trade development, job creation and overall economic growth. The direct link between corruption and diminished FDI is a red flag that should compel the Nepal government to reinforce, rather than weaken, its anti-corruption laws. Corrupt practices, ranging from bribery to mismanagement in awarding of government contracts, have resulted in a lack of transparency, making it difficult for foreign companies to navigate the regulatory landscape. This not only discourages potential investors but also reduces the chances of success for those who do invest.

Current State of Anti-Corruption Legislation

The Prevention of Corruption Act of 2002 was designed to curb corruption by creating a robust legal and governance framework in all sectors. However, the act’s provisions have not been effectively implemented, allowing corruption to thrive. Despite its inherent potential, the existing legislation has failed to bring about significant changes due to weak enforcement mechanisms, lack of political will and insufficient resources allocated to anti-corruption agencies. This legislative shortcoming is a critical reason why corruption remains pervasive in all sectors, particularly, when it comes to government procurement and awarding of state contracts, where conflict of interests run rampant. One recent example is Wide-Body Aircraft scam which resulted in a loss of Rs 1.47 billion ($13.38 million) to the government which involved the anti-graft body accusing various government ministers and senior management of the procuring company Nepal Airlines.

Fight Against Corruption

There is an urgent necessity for Nepal to figure out how to make itself as attractive an investment destination as possible. It must pave the way to make it easier to do business for international investors. This would have a two-way effect: not only would it make it easier to attract international investors but also make it easier for Nepalis to start business. In addition to having operations of multinational companies, it also allows for Nepalis who have gone abroad to come back and build the economy here. To achieve this, it is important that the legislative framework in regard to corruption is rectified in the correct way.

The corruption bill should be ratified to align with international standards, particularly the United Nations Convention against Corruption. This move had been proposed in 2013 by the government. However, it was shelved for no reason even whilst Nepal being a member of the convention. Strengthening the law to counter conflicts of interest in government contracts and procurement is essential for creating a transparent and accountable system. Moreover, aligning Nepal’s anti-corruption laws with international standards is crucial. Joining the OECD Anti-Bribery Convention would demonstrate Nepal’s commitment to transparency and significantly enhance its appeal to foreign investors.

Another important step that the government can take is to increase the scope of the constitutional commission designed to counteract and safeguard Nepali public institutions, namely the Commission for the Investigation of Abuse of Authority (CIAA). This could be achieved by aligning the function of the body with the UN Convention Against Corruption which recommends signatory countries (including Nepal) to take appropriate measures to prevent corruption in the private sector, enhance accounting and auditing standards, and, where appropriate, impose appropriate penalties for failure to comply with such measures. There has been ongoing debate regarding this between the two ruling parties of Nepal (CPN-UML and Congress) leading to the formation of a sub-committee to forge consensus on amending the Corruption Prevention Act of 2002.

Specifically, the sub-committee is mulling over bringing a provision into the Act which allows for the CIAA to scrutinise private bodies obtaining government grants. This is a step in the right direction and one can hope that this leads to a thoughtful decision being made by the government. Widening the purview of the CIAA to include the private sector with a certain degree of government involvement without discouraging investment in these sectors by creating undue regulations and bureaucracy is essential in shutting down corruption.

The current global economic climate demands that Nepal capitalise on every opportunity to attract any form of investment into its various business sectors with tremendous potential including hydropower, tourism and agriculture. This can only be achieved by fostering a transparent and corruption-free environment.

Conclusion

Nepal’s fight against corruption is at a crossroads and the need for any means of capital investment into the country has never been greater. The recent debate over amending the Corruption Prevention Act has underscored the importance of maintaining a strong legal framework to combat corruption. The international community remains concerned about Nepal’s commitment to transparency and accountability and it is important for Nepal to create the right kind of environment to bring in much needed investment within the country.

Rather than weakening anti-corruption laws, the government should focus on strengthening them by aligning with international standards and improving enforcement. Becoming a member of the OECD Anti-Bribery Convention and adopting the UN Convention against Corruption more robustly would send a strong signal to the global market that Nepal is serious about reform. Another important step to take would be to enhance the role of the CIAA, including arming the commission with a framework to combat corruption in a consistent and robust manner. Only through a transparent, accountable and corruption-free environment can Nepal attract the FDI it needs to achieve sustainable economic growth and enhance its standing in the global economy.

(Pokharel is an audit senior associate at PriceWaterhouseCoopers in the UK.)

(This opinion article was originally published in December 2024 issue of New Business Age Magazine.)